You’ve historically been what is described as a typical 401(k) investor. By that, I mean you make contributions in a percentage roughly equivalent to what your employer will match and you rarely, if ever, make changes to your account.

However, today is a new day for you. Based on inspiration from something you heard on TV or the radio, you have decided to move a significant portion of your current assets to a brokerage account option available under your 401(k) plan. After resetting the password you likely forgot, you log in to your account and attempt to perform this transaction. Being a conservative investor, you’ve placed most of your assets in your Plan’s stable value fund. For some reason, every time you attempt to perform this transaction a message appears. In so many words, the message says this transfer cannot be completed as the self directed brokerage is considered a competing fund.

Competing fund? Competing with what?

Somewhere down the hall, another employee with a large amount in the stable value fund attempts to move a large amount of money to the most conservative of the target date funds available within the plan (the “XYZ Income Fund”). This particular fund has about 70% invested in bonds with the remainder in the stock market. This attempted transfer results in the same outcome: the transfer cannot be completed because the XYZ Income Fund is a competing fund.

Finally, another co-worker sits at their desk attempting to diversify their bond holdings. They too have a fairly sizable position in the stable value fund and now have the notion they need to build in some protection against inflation. For their transaction, they have chosen the Plan’s Treasury Inflation Protected Bond (TIPS) fund as the destination. The TIPS fund, in terms of maturity, hovers just beneath the average maturity of an intermediate term bond fund. Once again, this participant will not be allowed to liquidate stable value holdings for this transaction as the TIPS fund is a competing option.

We’ve previously discussed the culprit here: the equity wash. In simple terms, it means investors currently in a stable value fund aren’t allowed to transfer their assets to a competing fund without spending at least 90 days exposed to the risk inherent in the stock market. What’s new in this scenario is the definition of a competing fund. In the not-so-distant past, the wrap providers linked to stable value funds were nowhere near as concerned about transfers to and from self-directed brokerage accounts, income-oriented target date funds, or TIPS offerings.

In the good-old-days of pre-crash-2008, most of the concern was centered on the historical competitor of stable value funds: money market funds. To run afoul of the equity wash restrictions back then, an investor typically attempted to transfer between a money market fund and a stable value fund — or a short term bond fund and a stable value fund. Just about every other investment option was considered non-competing and, therefore, fair game for transfers to and from a stable value fund.

What changed? Everything, courtesy of the 2008 crash. While no wrap providers (to my knowledge) actually experienced a loss due to the crash, they have collectively run for cover. Several wrap providers withdrew from the marketplace. Those that remain have raised fees and tightened constraints on the stable value investment management community. The concern of wrap providers is justified in part by the fact that money market funds have paid next to nothing in the way of interest for the past couple of years. Participants seeking price stability and a modest amount of interest have a significant incentive to turn to stable value funds. Stable value funds, if they want to continue to be considered stable, can’t afford to allow a massive influx of new assets in a low interest rate market. They have to protect (restrict) their cash flows.

Some might argue that a participant transferring to a brokerage account may be doing so solely because they wish to buy individual stocks or stock funds that in no way compete with a stable value fund. It used to be that stable value funds would look the other way in this situation, as the amount of money transferred to brokerage accounts that ended up in money market funds or CDs was too small to worry about. While you as a 401(k) investor may intend to transfer to a brokerage account to buy stocks, many stable value managers are now going to eliminate the possibility that you could take some or all of those funds to instead buy something they feel is a competing option (hence the equity wash).

By the same token, it might seem a bit far-fetched to consider the income sleeve of a target date fund (which has 30%+ in stock) or an intermediate term TIPS fund to be a competing fund. After all, part of the implied—but not in any way guaranteed – premise of a stable value fund is that it doesn’t go down in value while these other investments can, and readily do, experience drops in their net asset values. Regardless of how it seems, a growing portion of the stable value community considers these types of investments to be competing options. Once again: equity wash.

401(k) investors have no control over this new reality as the terms are dictated by the wrap providers and stable value managers. There is, however, one thing you should do on a fairly regular basis: ask the recordkeeper holding your assets to define what the competing funds are within your plan. You will likely want to repeat this request every six months or so. There’s a good chance this list will soon expand, and the word “surprise” generally doesn’t have pleasant connotations within the realm of investments.

If you find you’ve now run afoul of the equity wash restrictions, there is, by design, little you can do to avoid them. Here are a few ideas that may be worth considering for those wishing to increase their positions within a stable value fund:

• Direct new contributions to the stable value option: This course of action won’t impact your existing assets, but it will slowly increase your exposure.
• Check your restrictions on “old” 401(k) accounts: You may have assets in a prior employer’s plan that can be moved to a stable value fund within that plan. You may also be able to roll those old assets directly in to the stable value fund within your current employer’s plan.
• Use brokerage or IRA accounts to offset the equity wash exposure: If you feel strongly enough about the need to transfer to a stable value fund that you are willing to move assets into the equity markets for 90 days, you can potentially mitigate the volatility by transferring other assets outside of the plan into safe havens like money market funds or CDs.